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Taking the Pulse of Congress on the RFS

While most of the headlines emanating from Washington, D.C., may be focused on new high profile scandals or political fights, it is critical not to lose track of important, yet decidedly less flashy, old business being tended to on Capitol Hill. Case in point is the current debate over the Renewable Fuel Standard (RFS).

Some background on the issue: The RFS is a federal mandate that forces companies that refine petroleum into usable fuels to incorporate a certain amount of renewable biofuels, predominantly corn-based ethanol, into the national fuel supply. The law, passed in 2005 under the Energy Policy Act and revised and expanded in 2007 under the Energy Independence and Security Act, set ever-increasing levels dictating precisely how many raw gallons of renewable fuel would need to be blended by the refineries into the US domestic fuel supply for the next several years.

The RFS was designed primarily to begin reducing the economic impacts of America’s dependence on foreign produced oil. Yet, despite it presently being only 6 years later, the energy market today would be almost unrecognizable in 2007. Aggregate energy consumption has plummeted while new technologies have ushered in a domestic oil and gas renaissance, putting the US on track to be energy self-sufficient for the first time since the 1950s. Given the changes in the energy market, this well-intended legislation has completely and quite spectacularly backfired.

The problem: In a nut shell, the primary issue boils down to how the government set the blend targets for the fuel supply. By setting a raw gallon figure for each year under the law in 2007, the government thought it had accurate projections on roughly how much fuel the US economy would be consuming for the following few decades. What they did not anticipate, however, was the massive economic downturn that would strike within the next year.

Overall fuel consumption crashed with economic activity. Yet with statutory floors on how much biofuel must be blended into the total fuel supply, refineries are now blending biofuel into the supply at a much higher percentage rate than anticipated. Within the next year, refineries are expecting to hit what is called the “blend wall.” This wall is a limit on the amount of ethanol that can safely be blended into the national fuel supply based on manufacturer specifications for engines and fuel station pumping equipment.

Currently, most gas stations and cars can safely pump and run on fuel that is blended with 10 percent ethanol, referred to as E-10. Hitting the blend wall means that total ethanol blended into the national fuel supply will exceed 10 percent, forcing refineries to either shut down production or produce higher blend fuels like E-15 and E-85, 15 and 85 percent ethanol blends respectively.

Either option presents major problems. If refineries cease production, supply of fuel to the market will drop below the level of demand resulting in fuel scarcity. Scarcity in any market is synonymous with higher prices, something most Americans can ill-afford at the moment. The other option presents its own unique problem.

Most cars on the road today can safely operate on E-10 blended fuel. However, automakers have warned that higher ethanol blend fuels can do substantial damage to non-Flex Fuel engines. While the Environmental Protection Agency (EPA) insists that most cars produced after 2001 can safely run on E-15 blends, automakers have again advised that non-Flex Fuel vehicle owners refrain from doing so, warning that using E-15 fuel will not only cause engine damage but also void factory warranties.

Further, most gas stations in the country are not properly equipped to store and dispense higher blend fuels. The blend wall phenomenon will force refineries that choose to continue fuel production to sell higher blend fuels, compelling gas stations, 95 percent of which are privately owned franchises, to either make tens of thousands of dollars’ worth of infrastructure upgrades or close up shop.

Happening in Congress: There are Republicans and Democrats in both the House and Senate that seem to recognize the looming RFS catastrophe. Late last month, Senator Barrasso (R-WY) introduced legislation entitled the Renewable Fuel Standard Repeal Act (S. 1195) which is a clean repeal of the 2005 and 2007 legislative provisions that enacted the RFS. The bill enjoys wide-support in the Senate, with Republican co-sponsors from across the caucus, from Senators Ted Cruz (R-TX) and Mike Lee (R-UT) to Orrin Hatch (R-UT) and John McCain (R-AZ). The bill also has a Democratic co-sponsor in Senator Mark Pryor (D-AR). The bill has been referred to the Senate Environment and Public Works Committee awaiting further action.

On the House side, where the RFS originated, the House Committee on Energy and Commerce has been conducting hearings this week on the RFS in the Subcommittee on Energy and Power. Representatives have heard from stakeholders from both the refineries and the renewable fuels industry. The general feeling from the first of these several hearings is that both Democratic and Republican members see the inherent issues with the RFS, disregarding the shockingly narrow testimony of Bob Dinneen, the President and CEO of the Renewable Fuels Association who testified that, “the Renewable Fuel Standard (RFS) has been an unmitigated success.” Several members on the GOP side expressed their interest and support of a House equivalent of a full repeal of the bill, including Subcommittee Vice-Chairman Steve Scalise (R-LA). However the majority opinion seemed to lean towards RFS reform rather than repeal, a view expressed by Chairman Ed Whitfield (R-KY).

The main justification for reform over repeal presented by GOP members on the committee largely echoed the sentiment of Representative John Shimkus (R-IL). While Democrats harped on the tired and misguided talking points of Climate Change and energy independence, Shimkus and other Republicans raised concern that RFS repeal would damage millions of dollars’ worth of investments made to companies involved in biofuel refining. What members on this subcommittee need to understand is that the costs of these investments pale in comparison to the potential economic consequences of anything short of a full repeal of the RFS.

Studies have shown that hitting the blend wall will devastate the fuel market and subsequently the entire economy. By 2014, estimates place the increase in gas prices, as a result of market scarcity, as high as a dollar more per-gallon. Struck particularly hard will be diesel fuel prices, estimated by some economists to rise by roughly 300 percent. Imagine the impact of a 300 percent increase in the price of transporting goods via diesel powered vehicles like cargo ships, tractor-trailers, and trains.

Estimates place the pan-economic cost of inaction on the RFS and the impending blend wall at a reduced Gross Domestic Product (GDP) of $770 billion by 2015.

Congress, especially Republicans on the Energy and Commerce Committee, needs to realize that only reforming the RFS is insufficient. Leaving the core of the law in place will, at best, only delay economic calamity, not avert it. At the core of the RFS is an ever-increasing level of biofuels that must be blended into the fuel supply annually, enforced by the EPA. Yet at the same time, the White House and the EPA are actively working to increase fuel efficiency standards and are imposing a never-ending stream of other economy-strangling regulations that are suppressing fuel consumption. If the RFS remains intact with only peripheral reforms made, the blend wall becomes inevitable, whether it hits this year or next.

Preserving a handful of private investments in biofuel companies isn’t worth subjecting the American economy to hundreds of billions in squandered capital to be shared by the entire country. Further, petroleum refining companies have pledged to still use a feasible and responsible level of biofuels like ethanol in their finished products, regardless of the RFS standards, meaning that private investments in biofuel firms will likely still bear fruit.

As the members of the Energy and Power Subcommittee weigh their legislative options, the Republicans in control of the committee should recognize that the more rational option is not inaction or some form of compromise simply for show. Their colleagues from across the aisle and conservative spectrum in the Senate have recognized this. The practical move to ensure fuel market and economic stability is a full repeal of what can only be described as an inherently shortsighted and outdated RFS. Republicans have the votes and bi-partisan support to create this important legislation and get it done; all that is left required is a proper grasp of the RFS situation and a little courage.

The Renewable Fuels Standard (RFS) is a federal mandate that requires gradually increasing amounts of biofuels such as corn-based ethanol and other experimental biofuels to be blended into the nation's fuel supply.